What Is a Trailing Threshold for Sales Tax Nexus?
Clarify sales tax nexus through trailing thresholds. See how historical sales data determines your business's multi-state tax collection duties.
A trailing threshold in sales tax refers to a specific look-back period during which a business’s sales or transactions are measured to determine if sales tax nexus has been established in a particular state. This concept gained prominence for businesses, especially those operating across state lines, after the 2018 South Dakota v. Wayfair Supreme Court decision. The ruling introduced economic nexus, allowing states to require out-of-state sellers to collect sales tax based on their economic activity, even without a physical presence.
Understanding Trailing Thresholds
A “trailing threshold” is a measurement period states use to determine if a business has met the criteria for economic nexus, obligating it to collect and remit sales tax. This measurement relies on a historical period, such as the previous calendar year or a rolling 12 months, rather than current sales activity. States use this look-back method to establish a sustained level of economic activity within their borders, contrasting with real-time measurements by identifying a past level of sales that indicates sufficient economic presence.
Meeting a trailing threshold establishes nexus with that state, triggering the requirement for the business to collect sales tax from its customers there. Even if a business’s sales fall below the threshold in a subsequent period, some states may still require continued compliance for a certain duration. This concept is sometimes referred to as “trailing nexus,” acknowledging that past business activities can have lasting economic impact.
Key Components of Trailing Thresholds
Trailing thresholds are defined by specific quantitative metrics businesses must monitor. The two primary metrics states use are sales volume and transaction count. Many states set a dollar amount of sales, such as $100,000, as a trigger for economic nexus. Some states also include a minimum number of separate sales transactions, often around 200, as an additional or alternative criterion.
Thresholds and their measurement periods vary among states. While a common structure is $100,000 in sales or 200 transactions, some states may only require one criterion or have different dollar amounts, such as California’s $500,000 sales threshold. The look-back period also differs, with some states using the previous calendar year, others a rolling 12-month period, or the current year-to-date. Businesses must understand the specific rules for each state where they conduct sales, as these details determine when a sales tax obligation arises.
Actions After Meeting a Trailing Threshold
Once a business meets a trailing threshold in a state, several mandatory actions must be taken. The first step involves registering for a sales tax permit with that state’s department of revenue. This registration is required before a business can begin collecting sales tax.
Following registration, the business must begin collecting sales tax from customers in that state on all taxable sales. This requires applying the correct state and local sales tax rates, which vary based on the customer’s location. Collected sales tax must then be remitted to the state at specified intervals. Filing frequencies are assigned by the state upon registration and commonly include monthly, quarterly, or annually, depending on sales volume.
Businesses are also required to file regular sales tax returns, even if no sales tax was collected during a period. These returns detail total taxable sales and the amount of sales tax collected. Failure to file returns or remit collected taxes on time can result in penalties and interest charges. Due dates for filing and payment are typically on a specific day of the month following the reporting period.
Ongoing Compliance for Trailing Thresholds
Maintaining compliance with trailing thresholds requires continuous monitoring and proactive management. Businesses must accurately track their sales data, including dollar amounts and transaction counts, for all states where they conduct business. This data tracking is necessary for states where nexus is established and where thresholds might be approached.
A regular, periodic review of sales data against each state’s specific trailing threshold requirements allows businesses to identify when a threshold is met or likely to be met. This practice provides time to prepare for new obligations. Many businesses leverage accounting software, enterprise resource planning (ERP) systems, or specialized sales tax compliance software to automate this process. These tools can collect data, monitor thresholds, calculate taxes, and assist with filing and remittance.
Proactive planning is key to managing sales tax obligations. Anticipating when a threshold might be met allows a business to complete necessary registrations and configure its systems for tax collection and remittance before the obligation becomes effective. Staying informed about changes in state tax laws and nexus rules is also an important part of an effective compliance strategy.